It’s a been a major frustration for fledgling ventures trying to commercialize technologies and research from UCLA: For 25 years, University of California campuses have been barred from making direct investments in companies spun off from campus research. The ban cut off a vital source of capital for startups.

But late last month, the University of California rescinded its ban on direct investment and allowed its campuses to take equity stakes in fledgling spinoffs instead of charging them fees.

At UCLA, these changes could benefit startup ventures in three programs: the California NanoSystems Institute; an accelerator at the David Geffen School of Medicine; and Startup UCLA, a 10-week accelerator program for students looking to commercialize research.

“This both benefits startups that need to preserve capital and encourages the expansion of programs to commercialize research,” said Brendan Rauw, executive director of the UCLA Office of Intellectual Property and Industry Sponsored Research.

New UC President Janet Napolitano rescinded the ban on direct investment in order to boost technology transfer efforts at UCLA and the nine other UC campuses. Under the relaxed rules, the UC system or the individual campuses can invest in university-affiliated startups. She also allowed UC campuses to take equity stakes in spinoffs in lieu of charging fees for use of campus facilities. In addition, Napolitano announced the formation of a UC Innovation Council to craft a strategy to boost technology commercialization.

The most immediate impact for campus startups will likely be the option to give up a small equity stake instead of paying $500 a month or more in fees for the use of lab space, equipment and staff.

While $500 a month might be a steep discount from the going market rate for lab space, it is sometimes too much for debt-laden students and faculty researchers who face other expenses while trying to commercialize their technology, such as pursuing patents or hiring expert staff.

“These fees can add up very quickly,” said Wei Yu, chief executive of Lyxia Corp., a Culver City company that spun off two years ago from UCLA to commercialize its technology that turns microalgae into crude oil. “The charges were too much for some people I know; they were discouraged from forming companies.”

The eight companies at the California NanoSystems Institute on the UCLA campus pay about $500 a month in fees to the university, said Neelam Sullivan, the institute’s technology development manager. As a result of the policy change, when the companies’ annual leases come up for renewal, the institute will consider whether to continue charging the fees or give companies the option of offering an equity stake in lieu of payment.

But lifting the ban on investments might have a bigger impact long term on bringing new technologies to market. Direct investment was the model Stanford University used in the 1970s and 1980s that was one of the drivers behind the Silicon Valley tech machine.

Preventing favoritism

UC campuses at that time were allowed to make investments in spinoff companies. But in 1989, UC administrators banned the practice, citing the need to prevent favoritism in the treatment of faculty.

“If the University were to be an equity participant in the work of one or more faculty members, it could be seen as favoring those faculty members, and could be in conflict with the University’s role to support scholarship and allocate institutional resources in an evenhanded manner,” administrators said in a statement accompanying the ban.

The practical effect of the ban has been frustrating for many spinoffs and terminal for a few. Faculty and student researchers have to spend time trying to raise money from outside sources, often without success.

Lyxia’s Yu said that he had a hard time two years ago when he was raising money to continue his venture to turn algae into crude oil. Potential angel investors balked because the university still held the license to the patents for the technology.

“It wasn’t until we got the license transferred to our company – a process that took a year – that the investors finally decided to fund us,” he said.

Yu added that he knew of other technology transfer ventures that went under because they couldn’t get funding in a timely manner.

“Having the UC system for raising money will help tremendously with this vital seed money,” he said.

The ban on direct UC investment was one reason behind the launching in the late 1990s of the UCLA Venture Capital Fund, a private effort by venture capitalists with UCLA connections to invest in university startups. (The Business Journal profiled this fund in its June 16 issue.)

“The policy was outdated in many respects,” said Brooke Converse, spokeswoman for Napolitano.

Long road ahead

But it will likely still be several more years before the UC system or individual campuses start making direct investments in companies. First, UC administrators must determine whether to launch an investment fund and craft guidelines for that fund.

Also, investing in startup companies can be quite risky; if ventures fail, taxpayers and fee-paying UC students could end up paying the tab.

“The risk profile of early stage capital is very high, almost speculative,” said Christian Behrenbruch, chief executive of ImaginAb Inc., an Inglewood medical imaging company that spun off seven years ago from UCLA. He believes there will be caps on the amount that UC or its campuses could invest, so investment returns for UC and its campuses would be limited.

“If you put $200,000 into a startup, yes, it will help that startup get off the ground,” he said. “But that should be viewed more as greasing the skids for technology transfer and not as a potential investment windfall.”

In the meantime, university administrators might consider other options, such as connecting startups to outside venture capital, UC spokeswoman Converse said.

As for the university accepting equity stakes in companies in lieu of facility fees, Behrenbruch said that’s essentially free money for the companies, since it would be years before the equity stake is actually worth something. And, if the venture were to fail, the equity stakes would be worthless.

“Sure, I would have loved to have been able to take advantage of this, who wouldn’t like free money?” he said. “But I would rather pay the fees – which were quite reasonable for us – and see the university put that money into upgrading the lab space and obtaining the very best equipment.”

These are among the issues that the new UC Innovation Council might tackle as it meets for the first time next month. The council will include venture capitalists, business executives and university administrators; its goal will be to find ways to boost the spinoffs trying to commercialize university research.

“The technology and companies incubated at UC have a direct and critical impact on the state’s economic growth and our continued support is integral to our university’s public mission,” Napolitano said.